TODAY'S ROAD TO CAR OWNERSHIP CAN CURVE RIGHT INTO A LOAN `TRAP'<BR>
EVER-COSTLIER AUTOS' VALUES DROP FASTER THAN THE DEBT IS PAID OFF

It's always been possible to lock yourself out of some cars. Now, thanks to the new, ultra-long-term auto loans, it's becoming possible to lock yourself in.

As car prices continue to climb, auto loans are beginning to take on an uncomfortable resemblance to home mortgages, offering terms that stretch farther into the future than ever before.But cars, unlike houses in most markets, lose their value as time passes, and lose it very rapidly. Loans, on the other hand, are structured so that the early payments are mostly interest, and the outstanding principal declines very slowly at first.

As a result, the car's value declines more rapidly than the loan is paid down, and may dip below the amount outstanding on the loan. The less the down payment and the longer the loan's term, the more likely this is to happen. And in a very-long-term loan, the balance can exceed the car's value for several years. Lenders refer to such a loan as "upside-down."

For both borrower and lender, this can be a trap. If you own a three-year-old car with a value of, say, $7,500 but still owe $8,000 on the loan, you're stuck with the car unless you can come up with $500 to close that gap.

Your lender is just as stuck. If you default and he forecloses, he takes a $500 loss plus any transaction costs he may incur.

The long loans are not even very popular with dealers and manufacturers. If you can't sell and you can't trade, you are out of the car market. Only when you have paid the principal down until it matches your car's value can you trade or sell without putting up more money.

"It extends out the trading cycle more than we'd like to see as a car company," said J.E. Farrell, president of Chrysler Credit Corp. Nonetheless, he added, "extended terms seem to be part of the marketplace reality."

The reason is that long-term loans offer a feature that is paramount to many car buyers low monthly payments. And the auto companies will go along because they can raise prices and still sell cars.

For example, a $20,000 loan at 10 percent interest over 48 months requires a monthly payment of $507, according to Don Grigley of Connecticut National Bank in Hartford, Conn., whereas a $26,000 loan at 10 percent over 72 months requires a monthly payment of $482. By stretching out the term, "you've decreased the payment although you've increased the price by $6,000," he said.

This phenomenon, coupled with a decline in interest rates, has been particularly important to foreign car makers, who have been able to obscure big price increases caused by the declining dollar. J.D. Power and Associates, a California-based auto market research firm, calculates that with rates dropping from 13 percent in 1985 to about 10 percent this year and terms stretching from 48 months to 60, a 30 percent rise in the price of a car from $12,000 to $15,600 would result in a payment rise of only 3 percent from $321.96 to $331.50.

Power's surveys show that more than half of those buying a car on credit like many home buyers are more concerned with the size of the payment than the overall cost of the vehicle.

So the terms continue to grow. Twenty years ago, 24 months was the norm for a car loan. That grew to 36 and then to 48. Today, most lenders offer 60-month loans, and many offer 72. Volvo offers 120.

"Business has moved dramatically to 60 months," said Don Cook of Ford Motor Credit, Ford's financing subsidiary. "Over 70 percent is now at 60 months."

Consider what happens to a $10,000 loan at 10 percent as the repayment time grows. On a 24-month term, the payments are $461, the loan balance after one year is $5,249, and the total interest cost over the life of the loan is $1,075. Over 48 months, the numbers are $254 for the payment, $7,860 for the balance after a year, and $2,174 for the total interest cost. At 72 months, the figures are $185, $8,719 and $3,338.

Or imagine if you had bought a 1984 Lincoln Continental four years ago say, for simplicity, on Jan. 1, 1984. Its list price was a bit over $22,000 for a base model. If you had paid that, put 10 percent down and borrowed $20,000 over 72 months at 10 percent, you would have owed $17,438 a year later. But your car, according to figures compiled by CCC Information Services of Chicago, would have been worth $16,800 $638 less than your debt.

After two years, the loan balance would have been $14,608 and the car's value would have been $14,750; after three years, the loan balance would have been $11,483 and the car's value $12,100. Only after the fourth year, when your loan would have been paid down to $8,029 and the car's value would have been $10,000, would the balance swing.

"And that's a car that holds its value pretty well," said David B. Mullen of CCC.

Lenders, particularly those owned by car manufacturers, recognize the problems.

Cook said that in his view a long loan "is not a good deal for the consumer. It takes longer and longer to gain any equity in the vehicle. And it becomes more and more difficult to get these people refinanced down the road."

"Ten years is a long ways out for something that depreciates in value," said John Andrews, a spokesman for General Motors Acceptance Corp., the auto giant's financing arm. "I'm not sure you'll ever see GMAC at that point."

At the same time, lenders are in business to make loans and they will offer what the market seems to demand. So, in addition to longer terms, they are offering such twists as home equity loans, which allow a borrower to secure his car loan against his house as well as his car and thus preserve his interest deduction. They also are offering balloon-payment car loans, which keep payments down by requiring a whopper at the end.

A consumer considering either a long-term car loan or one of these other novel arrangements might want to stop and think for a moment that the market may be sending him a message: if you have to finance your new car this way, you probably can't afford it.

However, this is not a message most consumers want to hear. So, what to do?

"Put down as much as you can and pay off the balance as fast as you can," said GMAC's Andrews.

If that's not practical, and you just can't do without your rolling status symbol, consider a lease. Ford's Cook noted that the payments on a 36-month lease and a 60-month sale are about the same, making that an option.